Read The Death of Money Online
Authors: James Rickards
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From Bretton Woods to Beijing
The euro project is a part of the more broadly based international monetary system,
which itself is subject to considerable stress and periodic reformation. Since the
Second World War, the system has passed through distinct phases known as Bretton Woods,
the Washington Consensus, and the Beijing Consensus. All three of these phrases are
shorthand for shared norms of behavior in international finance, what are called
the rules of the game
.
The Washington Consensus arose after the collapse of the Bretton Woods system in the
late 1970s. The international monetary system was saved between 1980 and 1983 as Paul
Volcker raised interest rates, and Ronald Reagan lowered taxes, and together they
created the sound-dollar or King Dollar policy. The combination of higher interest
rates, lower taxes, and less regulation made the United States a magnet for savings
from around the world and thereby rescued the dollar. By 1985, the dollar was so strong
that an international conference was held at the Plaza
Hotel in New York in order to reduce its value. This was followed by another international
monetary conference in 1987, at the Louvre in Paris, that informally stabilized exchange
rates. The Plaza and Louvre Accords cemented the new dollar standard, but the international
monetary system was still ad hoc and in search of a coherent set of principles.
In 1989 the missing intellectual glue for the new dollar standard was provided by
economist John Williamson. In his landmark paper, “What Washington Means by Policy
Reform,” Williamson prescribed the “Washington Consensus” for good behavior by other
countries, in the new world of the dollar standard. He made his meaning explicit in
the opening paragraphs:
No statement about how to deal with the debt crisis . . . would be complete without
a call for the debtors to fulfill their part of the proposed bargain by “setting their
houses in order,” “undertaking policy reforms,” or “submitting to strong conditionality.”
The question posed in this paper is what such phrases mean, and especially what they
are generally interpreted as meaning in Washington. . . .
The Washington of this paper is both the political Washington of Congress and . . .
the administration and the technocratic Washington of the international financial
institutions, the economic agencies of the US government, the Federal Reserve Board,
and the think tanks.
It is hard to imagine a more blunt statement of global dollar hegemony emanating from
Washington, D.C. The omission of any reference to nations other than the United States,
or any institution other than those controlled by the United States, speaks to the
state of international finance in 1989 and the years that followed.
Williamson went on to describe what Washington meant by debtors “setting their houses
in order.” He set forth ten policies that made up the Washington Consensus. These
policies included commonsense initiatives such as fiscal discipline, elimination of
wasteful subsidies, lower tax rates, positive real interest rates, openness to foreign
investment, deregulation, and protection for property rights. The fact that these
policies favored free-market capitalism and promoted the expansion of U.S. banks and
corporations in global markets did not go unnoticed.
By the early 2000s, the Washington Consensus was in tatters due to the rise of emerging
market economies that viewed dollar hegemony as favoring the United States at their
expense. This view was highlighted by the IMF response to the Asian financial crisis
of 1997–98, in which IMF austerity plans resulted in riots and bloodshed in the cities
of Jakarta and Seoul.
Washington’s failure over time to adhere to its own fiscal prescriptions, combined
with the acceleration of Asian economic growth after 1999, gave rise to the Beijing
Consensus as a policy alternative to the Washington Consensus. The Beijing Consensus
comes in conflicting versions and lacks the intellectual consistency that Williamson
gave to the Washington Consensus. Author Joshua Cooper Ramo is credited with putting
the phrase
Beijing Consensus
into wide use with his seminal 2004 article on the subject. Ramo’s analysis, while
original and provocative, candidly admits that the definition of Beijing Consensus
is amorphous: “
the Beijing Consensus . . . is flexible enough that it is barely classifiable as a
doctrine.”
Despite the numerous economic elements thrown into the stew of the Beijing Consensus,
Ramo’s most important analytic contribution was the recognition that the new economic
paradigm was not solely about economics but rather was fundamentally geopolitical.
The ubiquitous John Williamson expanded on Ramo in 2012 by defining
the five pillars of the Beijing Consensus as incremental reform, innovation, export-led
growth, state capitalism, and authoritarianism.
As viewed from China, the Beijing Consensus is a curious blend of seventeenth-century
Anglo-Dutch mercantilism and Alexander Hamilton’s eighteenth-century American School
development policies. As interpreted by the Chinese Communist Party, it consists of
protection for domestic industry, export-driven growth, and massive reserve accumulation.
No sooner had policy intellectuals defined the Beijing Consensus than it began to
break down due to internal contradictions and deviations from the original mercantilist
model. China used protectionism to support infant industries as Hamilton recommended,
but it failed to follow Hamilton’s support for domestic competition. Hamilton used
protectionism to give new industries time to establish themselves, but he relied on
competition to make them grow stronger so they could eventually hold their own in
international trade. In contrast, Chinese elites coddled China’s “national champions”
to the point that most are not globally competitive without state subsidies. By 2012,
the deficiencies and limits of the Beijing Consensus were plain to see, although the
policies were still widely practiced.
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The Berlin Consensus
By 2012, a new Berlin Consensus emerged from the ashes of the 2008 global financial
crisis and the European sovereign debt crises of 2010–11. The Berlin Consensus has
no pretensions to be a global one-size-fits-all economic growth model; rather it is
highly specific to Europe and the evolving institutions of the EU and Eurozone. In
particular, it represents the imposition of the successful German model on Europe’s
periphery through the intermediation of Brussels and the ECB. German chancellor Angela
Merkel has summarized her efforts under the motto of “More Europe,” but it would be
more accurate to say that the project is about more Germany. The Berlin Consensus
cannot be fully implemented without structural adjustments in order to make the periphery
receptive and complementary to the German model.
The Berlin Consensus, as conceived in Germany and applied to the Eurozone, consists
of seven pillars:
Each one of the seven pillars implies policies designed to promote specific goals
and produce sustained growth. These policies, in turn,
presuppose certain monetary arrangements. At the heart of the Berlin Consensus is
a recognition that savings and trade, rather than borrowing and consumption, are the
best path to growth.
Taking the elements of the Berlin Consensus singly, one begins with the emphasis on
innovation and technology
as the key to a robust export sector. German companies such as SAP, Siemens, Volkswagen,
Daimler, and many others exemplify this ethic. The World Intellectual Property Organization
(WIPO) reports that
six of the top ten applicants for international trademark protection in 2012 were
EU members. Of 182,112 applications filed under the WIPO Patent Cooperation Treaty
in 2011, 27.5 percent were filed by EU members, 26.8 percent by the United States,
and 9.0 percent by China. The EU’s attainments in university education, basic research,
and intellectual property are now on a par with those of the United States and well
ahead of China’s.
Intellectual property drives economic growth only to the extent that business can
utilize it to create value-added products. A key factor in the ability of business
to drive productivity through innovation is a
low corporate tax rate
. Statutory tax rates are an imperfect guide because they may be higher than the tax
rate actually paid due to deductions, credits, and depreciation allowances; still,
the statutory rate is a good starting place for analysis. Here Europe once again stands
out favorably.
The average European corporate tax rate is 20.67 percent, compared to 40 percent for
the United States and 25 percent for China, once local income taxes are added to national
taxes. Corporations in the EU are predominantly taxed on a national basis, meaning
tax is paid to a host country only based on profits made in that country, which contrasts
favorably with the U.S. system of global taxation, in which a U.S. corporation pays
tax on foreign as well as domestic profits.
Both the EU and the United States have managed to maintain
low inflation
in recent years, but Europe has done so with significantly less money printing and
yield-curve manipulation, which means its potential for future inflation based on
changes in the turnover or velocity of money is reduced. In contrast, China has had
a persistent problem with inflation due to Chinese efforts to absorb Federal Reserve
money printing to maintain a peg between the yuan and the dollar. Of the three largest
economic
zones, the EU has the best track record on inflation both in terms of recent experience
and prospects going forward.
The EU’s approach to
infrastructure investment
has resulted in higher quality and more productive investment than that of either
the United States or China. Because large infrastructure projects in Europe typically
involve cross-border collaboration, they tend to be more economically rational and
less subject to political pressures. A prominent example is the Gotthard Base Tunnel,
scheduled to open in 2017, which will run thirty-four miles end to end beneath the
Swiss Alps, which tower ten thousand feet above it. The tunnel will be the longest
in the world and has rightly been compared to the Panama Canal and the Suez Canal
as a world-historic achievement in the advancement of transportation infrastructure
for the benefit of trade and commerce. Although the Gotthard Base Tunnel lies entirely
in Switzerland, it is a critical link in a Europe-wide high-speed rail transportation
network.
For passengers, the tunnel will cut an hour off the current three-hour-and-forty-minute
travel time from Milan to Zurich.
For rail freight traffic, the tunnel will increase annual capacity through the Gotthard
Pass by 250 percent, from the current 20 million tons to a projected 50 million tons.
The Gotthard Base Tunnel will be linked to scores of high-speed rail corridors coordinated
by the EU’s Trans-European high-speed rail network, called TEN-R. These and many similar
European infrastructure projects compare favorably in terms of long-term payoffs with
Chinese ghost cities and the U.S. practice of wasted investments such as solar cell
maker Solyndra and electric car maker Fisker, which both filed for bankruptcy.
The German labor-management coordination model for large enterprises, called
Mitbestimmung,
or codetermination, has been in place since the end of the Second World War. It was
expanded significantly in 1976 with the requirement that worker delegates hold board
seats of any corporation with more than five hundred employees. Codetermination does
not replace unions but complements them by allowing worker input in corporate decision
making in a regular and continuous way, in addition to the sporadic and often disruptive
processes of collective bargaining and occasional strikes. The model is unique to
Germany and may not be
copied specifically by other EU members. What is significant about codetermination
for Europe is not the exact model but the example it sets with regard to improving
productivity and competitiveness for business. The German model compares favorably
with that of China, where workers have few rights, and the United States, where labor-management
relations are adversarial rather than cooperative.
Of the Berlin Consensus pillars, the one most difficult to engender in the EU as a
whole, especially in the periphery, is the efficient labor pillar including
lower unit labor costs
. Here the policy is to force internal adjustment through lower nominal wages in euros,
rather than external adjustment either by devaluing the euro or by abandoning it in
favor of local currencies in countries such as Greece or Spain. Keynesians have argued
that wages are “sticky” and do not respond to normal supply and demand forces. Paul
Krugman puts the conventional Keynesian view as follows:
So if there were really a large excess supply of labor, shouldn’t we be seeing wages
plummeting?
And the answer is no—wages (and many prices) don’t behave like that. It’s an interesting
question why . . . but it’s simply a fact that actual cuts in nominal wages happen
only rarely and under great pressure. . . .
So there is no reason to believe that cutting wages would be helpful.
As with much of Keynesianism, this analysis applies at best to the special case of
heavily unionized labor in closed markets rather than nonunion labor in more open
markets. With regard to Europe, Krugman misses the most important point. The emphasis
on sticky wages and pay cuts assumes the workers involved already have or had jobs.
In Spain, Italy, Greece, Portugal, France, and elsewhere, millions of well-educated
youth have never had a job. This labor pool does not have any anchored expectations
about how much one should be making. Any job with decent working conditions, training,
and possibilities for advancement will prove attractive, even at wages that an older
generation might have rejected.